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Discover Still Hunting for Card Growth as it Pushes Into Mortgages

By Andrew R. Johnson While Discover Financial Services (DFS) is on a mission to expand through mortgage lending and student loans, it remains on the hunt for opportunities to expand its core credit-card business, seeking out new partnerships with membership groups and potential private-label deals. Discover, the sixth-largest credit-card lender by spending, last month announced a partnership with conservation group Ducks Unlimited through which it is marketing a Discover-branded credit card to the organization's 600,000-plus adult members. The deal is Discover's first so-called affinity partnership, in which banks market cards to trade groups, alumni associations and other membership organizations. "The affinity business is one the management team here knows and understands very well," Mark Graf, chief financial officer of Discover, said in an interview after the company reported earnings Tuesday. "Based on our primary experience, it's a business that does not really amount to a change in strategy for us." The Ducks Unlimited partnership "provides a really good foundation for us to begin expanding our efforts" in the market, Graf added. Bank of America Corp. (BAC) has been a major player in the affinity card market thanks to its 2006 acquisition of MBNA Corp., a credit-card lender that had scores of relationships with college groups and other associations. Discover Chief Executive David Nelms worked at MBNA before joining Discover in 1998. Bank of America has been scaling back in certain areas of the credit-card market more recently, selling smaller portfolios it issues on behalf of smaller banks and selectively renewing deals with certain partners. CEO Brian Moynihan told analysts in April that it has "narrowed that group" of affinity partners by paring "off several thousand programs" on which "the economics just didn't make sense." Betty Riess, a spokeswoman for Bank of America, said Tuesday it is "focused on those affinity relationships that bring us unique rewards, robust distribution channels and customers who will bring more of their banking business to us." Provisions of the Credit Card Accountability, Responsibility and Disclosure Act have caused lenders to rethink their strategies related to college affinity groups, given the law requires card issuers to disclose contracts they have with schools. The "affinity space has changed dramatically in the last few years," Nelms said during an earnings conference call Tuesday. "Service is critically important to groups and group members. We think we're well positioned to help address that marketplace." Discover executives also have cited private-label credit cards, or those issued on behalf of retailers and other businesses, as another area where it wants to expand. Last month, Graf said at a conference that Discover was "intrigued" by parts of HSBC Holdings PLC's (HBC) U.S. credit-card portfolio, which included a large number of card programs for retailers such as Best Buy Co. (BBY) and General Motors Co. (GM). Capital One Financial Corp. (COF) ultimately acquired that business in May. Discover finds the private-label business "attractive," but it has been "difficult to find an entry point into that business," Graf said. "It's concentrated into three or four big players today, and the last I checked none of them are openly, readily available at this moment." Citigroup Inc. (C) last year reincorporated its approximately $40 billion portfolio of retail cards into its main business after scrapping plans to sell the business, which it deemed noncore after losses surged during the financial crisis. The Wall Street Journal reported earlier this month that General Electric Co. (GE), the largest issuer of private-label credit cards, is considering selling parts of its portfolio, an effort it attempted around 2008 but later abandoned. Graf declined to say whether it was looking at GE portfolios or cite other opportunities in the market. Efforts to expand credit-card lending come as Discover has pushed into new areas that could help it increase revenue at a time when borrowing remains tepid for many consumer-finance lenders. Discover last week launched its online mortgage business, through which it plans to originate home loans and sell them to investors. While the loans won't remain on Discover's balance sheet, they will help it generate fee income from originations. The company also has continued to expand its portfolios of personal loans and private student loans, which have increased partly due to acquisitions Discover made last year. The company on Tuesday reported its total loans rose 8.6% from the prior year to $57.06 billion in the fiscal second quarter, driven by growth in all three loan categories. However, its profit decreased 11% to $537 million as it set aside a larger amount of money to cover future loan losses, though it beat analysts' estimate. Discover's shares were up 2.4% at $33.62 in recent trading. Write to Andrew R. Johnson at andrew.r.johnson@dowjones.com